The National Minimum Wage (NMW) (AQA A Level Economics)

• Government's often intervene in the labour market by setting a minimum wage
  • They do this in order to improve equity & avoid the exploitation of worker
     
• A minimum wage is a legally imposed wage level that employers must pay their workers
  • • It is set above the market rate
    • The minimum wage/hour often varies based on age
      

Diagram: National Minimum Wage

A national minimum wage (NMW₁₎ is imposed above the market wage rate (W_e) at W₁

Diagram analysis

• The market equilibrium wage and quantity for truck drivers in the UK is seen at W_eQ_e
• The government imposes a national minimum wage (NMW) at W₁
• Incentivised by higher wages, the supply of labour increases from Q_e to Q_s
• Facing higher production costs, the demand for labour by firms decreases from Q_e to Q_d
• This means that at a wage rate of W₁ there is excess supply of labour & the potential for unemployment equal to Q_dQ_s

Evaluating the use of Minimum Wages

Advantages	Disadvantages
Guarantees a minimum income for the lowest paid workers   Higher income levels help to increase consumption in the economy   May incentivise workers to be more productive	Raises the costs of production for firms that may respond by raising the price of goods/services   If firms are unable to raise their prices, the introduction of a minimum wage may force them to lay off some workers, increasing unemployment